Responsible Contracting in Sustainable Procurement

Why is responsible contracting important?

Responsible contracting and the rise of mandatory HREDD

The business case for adopting responsible contracting

• Increasing economic efficiency and financial gains

  Research on “formal relational contracting” or “vested contracting” led by David Frydlinger, Nobel prize winner, Oliver Hart and Professor Kate Vitasek, has shown that companies that formally share risk for the success (or failure) of their venture in their contracts and project governance structures can achieve greater economic efficiency and financial gains. (Frydlinger, David, and Oliver Hart. 2024. “Overcoming Contractual Incompleteness: The Role of Guiding Principles.” The Journal of Law, Economics and Organization. 40, (3): 625-647.)

  Responsible contracting also fosters stronger, more resilient supplier relationships, which supports operational and organizational efficiencies and reduces the costs of switching suppliers.

• Promoting transparency

  Because of its focus on cooperation and non-retaliation, responsible contracting enhances transparency, which enables better identification, mitigation and, if needed, remediation of adverse HRE impacts. This can reduce incidents of harm to people and planet, enable businesses to meet new legal HREDD and reporting requirements (as explained in the "regulatory compliance" section), reduce litigation and reputational risks and reduce supply chain disruptions.

• Attracting investment

  With the rise of regulations around sustainable investments, such as the EU Sustainable Finance Disclosure Regulation (SFDR), investors are increasingly focused on the long-term sustainability of their investments. Supply chain transparency is essential for attracting investment and addressing investor concerns regarding compliance and HRE performance.

• Reducing reputational risks

  Preventing HRE adverse impacts is the most effective way to avoid costly reputational damage and supply chain disruptions caused by protests, strikes, workplace accidents or production delays linked to audits and investigations. By incentivizing transparency, businesses can address issues proactively rather than react to negative media coverage.

• Strengthening supply chain resiliency

  Global value chains are exposed to external risks and shocks such as pandemics, climate change and geopolitical tensions, which can result in great harm to people and planet. Businesses can mitigate some of these risks through responsible contracting. Ongoing collaboration in times of crisis, as distinct from short-sighted cut and run exits, can support continued adherence to HRE standards and strengthen supply chain resiliency, particularly with respect to crisis recovery. It’s much harder for businesses and supply chains to recover from a crisis when ties have been broken, as happened during the COVID-19 pandemic.

Responsible contracting as a framework for economic development and inclusive growth

• Pricing and wages

  Living wages play a crucial role in advancing decent work and driving sustainable development, but they are often not paid in supply chains and typically left out of contracts, beyond a commitment for the supplier to abide by (local) minimum wage laws.

  For example, according to some estimates, less than 10% of garment workers who produce clothing for major brands earn a living wage.

  Responsible contracts require buyers (e.g., brands and retailers) to commit to cooperating with the supplier (e.g., factories and farms) to agree to a price that can cover the costs associated with paying a living wage or the minimum wage, whichever one is higher. This would result in a higher quality of life for garment workers. See the Supplier Model Contract Clauses 1.0 (SMCs) and the European Model Clauses (EMCs) for tools with the most explicit language on living wages. As a first step, companies can commit to paying living wages in supply chains through the Forward Faster initiative.

  Forward Faster Initiative

  In September 2023, the United Nations Global Compact launched Forward Faster, a global initiative designed to drive credible, ambitious corporate action to guide companies on where they can collectively make the biggest, fastest impact by 2030. Forward Faster challenges businesses to raise their ambition levels by taking tangible, accountable actions in five key areas — living wage, gender equality, climate, water resilience and sustainable finance. These are the five areas where the private sector is best positioned to accelerate progress across all 17 Sustainable Development Goals.

  Through Forward Faster, companies can commit to and report on two living wage targets:

  • Target 1: 100 percent of employees across the organization earn a living wage by 2030.
  • Target 2: Establish a joint action plan(s) with contractors, supply chain partners and other key stakeholders to work towards achieving living wages and/or living incomes with measurable and time-bound milestones.

  UN Global Compact participating companies can sign up for the target(s) here.

• Working hours

  Reasonable working hours are essential for decent work, as they help maintain a healthy work-life balance, reduce stress and burnout and enhance overall productivity and well-being for employees. In the apparel industry, it’s not unheard of for garment workers to endure 18-hour days to meet a deadline.

  Responsible contracting commits buyers to support better working conditions via, for example, cooperating with suppliers to set reasonable production timelines and negotiate order changes so that working hours are more humane and predictable. You can learn more about working time and how to ensure work-life balance in the UN Global Compact Business and Human Rights Navigator.

• Remediation

  What happens if something goes wrong and a human rights violation occurs?

  In traditional contracts, the buyer usually has the right to cancel an order or the entire contract at the first sign of trouble and to cut ties with the supplier without remediating the injuries suffered by the victims of the human rights violation or taking measures to prevent the recurrence of the violations.

  For example, in the 2013 Rana Plaza factory collapse in Bangladesh, victim-centered remedy was not required under contracts and many of the victims and their families never received appropriate remedy (e.g., funds to cover their medical bills or lost wages) to help them recover from the disaster.

  While exit may help shore up the reputation of the buyer in the short term, it does little to remediate the injuries suffered by the victims of the human rights violation. Moreover, cutting ties can make adverse human rights impacts much worse.

  Responsible contracts are structured to place remediation ahead of traditional contract remedies and allow exit only as a last resort, if it becomes clear that this is an un-fixable problem. They also commit the parties to work together and with other relevant actors to provide remedy to adversely-affected stakeholders.

• Responsible exit

  The Supplier Model Contract Clauses 1.0 (SMCs) were developed by RCP and the Sustainable Terms of Trade Initiative (STTI), a consortium of apparel and textile suppliers and manufacturing associations, in response to an express request from STTI members for model clauses that they could bring into their negotiations and contracts with their buyer-clients.

  This request came as the sector was still reeling from the wave of order cancelations during the COVID-19 pandemic when apparel brands and retailers cancelled billions of dollars in clothing orders, contributing to layoffs and wage theft in the supply chain. These cancellations were often upheld by contract terms that did not consider the human rights impacts on garment workers.

  The SMCs contain several obligations for the buyer, including with respect to responsible exit, even in the event of an unforeseen crisis like a pandemic.

Case examples